Claremont files for bankruptcy, operations unaffected

The Claremont Hotel & Spa, a fixture in the Berkeley hills since 1915, was part of a luxury hotel group that filed for bankruptcy yesterday. The Claremont and seven other resorts were part of a $6.6 billion acquisition by Morgan Stanley in 2007. When debt of $1.5 billion came due yesterday, lenders foreclosed on five of the properties (three other properties with longer-term debt did not file for Chapter 11 protection).

The lenders, led by hedge fund Paulson & Co, stated in a press release that they intend to work down the debt and position the hotels to benefit as the economy improves. The last few years have been particularly bruising for the luxury end of the travel industry, and the Claremont has suffered from poor occupancy rates.

The Morgan Stanley purchase came right near the top of the market for luxury properties. Although business turned down soon after the acquisition, there was some investment in the Claremont, including a complete revamping of its main restaurant, The Meritage, refurbishment of guest rooms, and the addition of a new children’s pool.

For many Berkeleyans, the Claremont is primarily used for its health and tennis club (and Berkeleyans also know that the resort has a Berkeley address but is technically in Oakland). Jokey emails were flying around this morning imploring members to make sure they returned towels, but people seemed unfazed by the bankruptcy.

“I’m not surprised, nor am I particularly alarmed because the Claremont will always be a crown jewel in a portfolio,” said Dennis Woodruff, a member at the health club for over 20 years. “I believe the lenders will do their best to maintain the property.”

The press release on the financial restructuring of the portfolio states: “These events have no impact on the management, staff or operations of the resorts, which will continue to provide the same uninterrupted level of luxury service and experience to guests, resort members and other customers, and remain committed to their local communities. In addition, Pyramid Hotel Group will continue to act as asset manager for the eight resorts, providing continuity to the operation and management for all stakeholders in the portfolio.”

Paulson & Co came to particular prominence when the housing market collapsed in 2007, because of a prescient trade against sub-prime mortgages. The Greatest Trade Ever, by Gregory Zuckerman, is all about Paulson’s coup, which earned more than $15 billion for the hedge fund. It’s striking that at the same time the fund was foreseeing the housing collapse, it was also lending at the top of the market for luxury hotels.

Update 9:45 pm Some Berkeleysiders who understand hedge funds contacted us about the last paragraph above. They reckon that it was unlikely that Paulson & Co participated in the initial loan to Morgan Stanley. The probability is that Paulson & Co acquired their interest at a depressed price, which will make a turnaround in the portfolio that much more lucrative for the fund. A spokesman for Paulson & Co declined to comment.

We had plans to try out the bar there since there seems to be such a great view to SF on a non-foggy day. Now that I know who owns it, I would rather support a real local business. I guess I will be back at Gaumenkitzel from where I had a great view of the mural at La Tienda.

Eva, you’re clearly made of tougher stuff than I am. The view from the Paragon deck overrides concerns about ownership.

Bruce Love

@Lance, re: “It’s striking that at the same time the fund was foreseeing the housing collapse, it was also lending at the top of the market for luxury hotels.”

It’s the same bet, though, right? If “you”, the bet maker is wrong about the real estate bubble then the Morgan Stanley loan doesn’t default and that’s fine, the loan simply performs. If you are right, for less than $1.5B you just got darn near effective controlling interest in some primo properties that last sold for $6.6B. The loans are arguably worth more in default than as written.

Bruce: it’s probably even more interesting than that. See the update I’ve posted above.

Bruce Love

Thanks, Lance. Very neat.

Valenta

yes, the view(the other stuff is interesting, but….) is key, and another place to eat with a stunning view of the bay is….(drumroll accepted) at Lawrence Hall of Science..Actually, I always wished Business nightmare, eh?
Low Brow, go for lunch with lots of tots at the science center, or, go to the Claremont!

Eva Carleton

Lance,
Since I have not had the pleasure of the view yet, it is easy to be tough :-)

BRCLMTY

I checked out the view from the deck, but after I was seated at a table with my glass of wine, a waiter came up and informed me that the table was reserved – although there was no sign on the table. Very unfriendly – so I never went back.

EBGuy

Note to underwater homeowners. Your California (purchase money) mortgage came with an implied put and you have every right to exercise that option. As Morgan Stanley shows, it’s a business decision.